Business News Is The Swiss Watch Export Slump Over?

Each month the Federation of the Swiss Watch Industry (or FH, short for Federation Horlogère) issues global watch export sales data for the preceding month. This year, Swiss watch professionals are scouring the data with a bit more scrutiny than normal.

That’s because for more than two years, the industry has been in a slump. Wholesale sales, which the data reflects, have been anemic. In 2015, the global value of watch exports fell by 3.3% to 3.18 billion Swiss francs ($3.18 billion). Last year, they fell again, by a painful 9.9%. When they continued to drop in the first quarter of this year (-3.3%) brows really started to furrow. The worry was palpable at the giant Baselworld watch show in March. There I talked to more than two dozen Swiss watch executives and dealers: The consensus view was that the industry is ailing.

Crowds streaming into the 2017 Baselworld fair.

At the show, I wondered when it was that the Swiss last had three consecutive years of falling exports. As someone who covered the quartz crisis live (my first Basel Fair was in 1979: it wasn’t pretty), I figured it had to be the '70s or '80s.

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But it wasn’t. When I got home from the fair, I dove into my file of Swiss watch export data. I’ve got the full set, back to 1885 when the Swiss began keeping such records. What I learned alarmed me. Since 1885, the total number of times the Swiss watch industry has had back-to-back-to-back drops in exports was two. TWO! In 1907-’08-’09 and 1930-’31-’32. It struck me that if 2017 is another downer, and the Swiss watch industry has its first three-year slump since the Great Depression, things are worse than people realize.

Since then, the monthly FH data releases have seemed more like medical reports on an ailing uncle. The latest one came out today and the diagnosis is mixed. The patient is getting a little better. Underline little.

Export sales in August were up 4.2% over August 2016. That’s the fourth consecutive month of increases. Considering that exports had fallen for 20 consecutive months through February of this year, that’s progress. “The overall trend is one of continuing recovery,” the FH said, emphasizing the positive.

But if this is a recovery, it’s an extremely fragile one. For all of 2017, exports are up just 1.2% over a dreadful 2016. They remain 9.8% behind the weak performance of 2015. And the list of ailments afflicting the patient remains long: an overvalued Swiss franc, overproduction, overpricing, the rise of e-commerce and the decline of brick-and-mortar retailers, a Noah-sized flood of gray market goods available at jaw-dropping discounts, changing notions of luxury (experiences over possessions) among Millennials. I could go on.

Still, two of the industry’s biggest troubles – the collapse of the top market, Hong Kong, and weakness in the number three market, China – have improved and bode well for the budding rebound. Meanwhile, the situation in the baffling, disappointing number two market, the United States, is getting worse. Here’s my take on what’s behind the numbers.

China

This year’s most important development for the Swiss watch industry is the revival of the mainland China market. China is riding to the Swiss industry’s rescue – again. During the Great Recession of 2009, when exports dropped a hair-raising 22.3%, the China boom saved the Swiss-watch day. Exports came roaring back by 22.7% in 2010, and the China legend was born.

In 2012, the boom went bust when the government began a severe anti-corruption campaign that unexpectedly turned luxury watches into the poster child for bureaucratic misbehavior.

Now, though, China is hot again. “Mainland China has been really quite strong and has been for nine months,” the Richemont Group’s outgoing chief financial officer, Gary Saage, told financial analysts in May. Through the first eight months of 2017, Swiss watch exports to mainland China are up 19.4%, the best among Switzerland’s 30 top markets. It’s part of a new surge of sales of luxury goods in China.

Analysts cite several factors. Five years on, anti-corruption fever is dying down and corporate gift-giving is picking up. The turmoil that roiled the Chinese stock market last year, and halted luxury spending, has subsided, resulting in a feel-good factor and shopping surge. The government has taken steps to boost consumer spending at home rather than abroad. It has cut visas to Hong Kong to prevent binge shopping there and slapped higher duties on luxury goods purchased overseas by Chinese consumers. And watch companies – Cartier is one – and other luxury firms have removed the so-called “China premium” on goods that drove up prices during the boom. The lower prices mean higher sales.

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Hong Kong

The collapse of Switzerland’s top market, Hong Kong, in 2015 has been a long-running nightmare for Swiss watch producers. Between January 2015 and February of this year, Swiss watch exports there declined every month. Exports finally rose in March, then fell 17% in April. The main cause of the downturn was the sudden disappearance of Chinese tourists, who had flocked to Hong Kong as a shopping Mecca. The Chinese government put visa restrictions on travel to Hong Kong in retaliation for anti-Mainland political and social turmoil in Hong Kong. The appreciation of the Hong Kong dollar against the Chinese yuan also hurt.

In May, the prognosis for Hong Kong was still grim. As Richemont’s Saage put it, “I wouldn’t say there are signs of life there. I wouldn’t call a bottom. It is getting less worse.” But Hong Kong may have bottomed out over the summer. Swiss exports to that market rose for the fourth month in a row in August and are up 2.9% year to date. It’s not a lot. But after the chronic pain of the 25-month losing streak, it comes as a relief to the Swiss. If Hong Kong can recover, it would re-establish the Greater China powerhouse (i.e., Hong Kong and China) that propelled Swiss watch sales to the record highs of 2011 and 2012. Still, at the moment, that’s a big if.

United States

As the Swiss see it, the United States should be leading the Swiss-watch recovery. Here’s why: America has a growing economy, a record stock market, low unemployment, a pro-business businessman president, and a Congress controlled by the pro-business Republican Party. In the past, those conditions guaranteed strong Swiss watch sales in the world’s strongest economy.

So why, oh why, the Swiss wail, is the United States headed for its third consecutive year of export declines? Swiss watch exports here dropped 4.9% in August and are down 4.7% year to date. They were down 9.1% last year and 0.8% in 2015.

One theory is that Americans are buying as many or more Swiss watches than ever. But they are buying them outside authorized distribution channels – from e-commerce sites selling gray-market watches – so the sales don’t show up in official FH data. “People are buying as many, if not more, Swiss watches,” says one U.S. watch industry consultant, who requested anonymity. “But they are buying them in other places.”

In March of last year, one of the industry’s biggest and best-known closeout specialists, Maurice Goldberger, owner of Montreal-based Chiron Inc., told Switzerland’s swissinfo.com news organization that his watch business was booming. “2016 got off to a flying start and the market is expected to grow over the next few years,” he said. “Our growth is particularly strong in North America,” he explained, because Americans are more inclined to buy new watches at bargain prices outside authorized distribution channels than are Europeans or Asians.

Record levels of gray market goods are one factor suppressing authorized Swiss watch sales in the United States. So are the rise of e-commerce, smartwatches and other new forces at work in the world’s most vibrant marketplace. As the FH noted in July about the U.S. market, “The situation has not improved for more than 12 months and, for the time being, there is nothing to suggest the outlook will brighten soon.”

Alas, the U.S. is not likely to be much help in the Swiss effort to avoid a dreaded three-year slump. We’ll know in a few months if they do or don’t. Either way, if they want to know why they are coming perilously close to an event that has happened just twice in 131 years, a close examination of what’s going on in the U.S. could prove very helpful.